China's natural gas drive may cut oil demand by a tenth

* Nearly 1.5 million natural gas vehicles on the road

* Could replace equivalent of 840,000 bpd of oil by 2030

* Part of plan to increase gas use nationwide

By Chen Aizhu

BEIJING, March 1 China's drive to fuel more
vehicles with cleaner-burning natural gas could reduce oil
demand by nearly a tenth - equivalent to Turkey's total oil
consumption - and may help ease its cities' toxic smog problem,
too.

The country's rise to become the world's biggest car market
has seen rapid growth, too, in oil demand over the past decade,
and has contributed to the heavy pollution that chokes its
cities. China is now the world's second-largest oil consumer
after the United States, burning some 9.6 million barrels per
day (bpd) - more than a tenth of global demand.

A Beijing-coordinated campaign to fuel more vehicles with
natural gas - part of a drive to reduce costly oil imports and a
dependency on coal - could increase gas consumption to as much
as 55 billion cubic metres by 2030, predicts energy consultancy
Wood Mackenzie - about equal to 840,000 bpd of oil.

That's about 10 times more natural gas than is used in
vehicles today, and close to 9 percent of China's oil demand.

HAILING COST BENEFITS

Taxi drivers have been quick to see the financial benefits,
too, of switching to natural gas.

The cleaner fuel is 50-70 percent the price of gasoline and
a third cheaper than diesel - savings that have encouraged rapid
take-up of natural gas among drivers, and enough to make people
like Yu Binghua queue for up to five hours to fill his
Volkswagen Jetta taxi.

Yu works in Jiuquan, a city of 400,000 people on the edge of
the Gobi desert in China's remote northwest, where all 800
municipal taxis run on gas. A first filling station was built
three years ago, Yu said, and a fourth is under construction.

"The money I save is the money I make," the 32-year-old
cabbie said by telephone.

While a gas engine can cost almost twice as much as a diesel
engine, the payback through using cheaper fuel is just 8 months,
said Shao Sidong, president of Westport-Weichai, a diesel engine
maker which now also manufactures gas engines.

The push to natural gas comes also as efforts by Beijing to
develop the electric car market, through heavy subsidies, have
failed to spark, partly because battery costs remain high and
charging facilities are few. Experts say electric cars lack mass
appeal as they are either too costly for many or not stylish
enough for the wealthy.

CAN INFRASTRUCTURE KEEP UP?

China last year had 1.48 million vehicles driving on natural
gas, up 48 percent on the previous year, and a huge jump from
just 6,000 in 2000, according to leading oil and gas producer
China National Petroleum Corp's (CNPC) research institute.

The vehicles - mainly taxis, buses and trucks - run on both
compressed natural gas (CNG) and liquefied natural gas (LNG).
LNG, gas that is super-chilled to liquid form, is more efficient
and can nearly treble a vehicle's driving range over CNG, say
experts. That is encouraging the roll-out of more LNG vehicles.
At the end of last year, there were 70,000 LNG vehicles on
China's roads and 400 LNG stations, the CNPC has reported.

Beijing in October targeted China's vast transport sector -
from buses and trucks to taxis and ships - as a preferred user
of natural gas.

The rapid growth in natural gas powered vehicles brings with
it the challenge of building an infrastructure to ensure Yu and
other drivers across China can fill up their cabs and buses as
easily as with gasoline or diesel. For now, natural gas vehicles
are mainly found in areas that produce natural gas, in China's
west and south west.

OLD KING COAL

The world's top energy consumer, China is the fourth-largest
gas user and aims to triple natural gas use to meet about 10
percent of total energy demand by 2020. The take-up in gas will
mostly make inroads into consumption of coal.

Beijing is working to boost domestic gas supply, but
consumption is growing at such a clip that China is becoming
increasingly reliant on LNG imports. State oil giants have
struck long-term deals with global LNG suppliers to meet future
import needs, with Australia supplying the most.

In a national new energy vehicle development plan released
last June, Beijing called for alternative fuels, mainly natural
gas, to replace at least 10 percent of transportation fuel by
2015. The natural gas industry, pioneered by small, independent
firms such as Xinjiang Guanghui Group, has been given added
momentum as bigger state oil companies have stepped in.

"The growth is driven by regulated fuel prices, the
environmental imperatives and the national oil companies'
efforts to support the use of natural gas in vehicles," said
Zhou Yingying, China gas market analyst at Wood Mackenzie.

LNG emits 28 percent less carbon dioxide and 90 percent less
sulfur dioxide than gasoline and diesel, according to industry
reports.

PETROCHINA MUSCLE

State-owned energy giant PetroChina
has increased its role in the LNG vehicle industry through
wholly-owned unit Kunlun Energy, previously a niche
upstream oil producer that now runs import receiving terminals,
wholesale distribution and retailing. It also helps retrofit and
convert vehicles to natural gas.

Kunlun Energy has two LNG import terminals on China's east
coast with combined annual capacity of 6.5 million tonnes. It
also owns and plans a string of inland liquefaction facilities
near PetroChina's domestic gas fields that could supply another
6 million tonnes of LNG a year by 2015, industry officials said.
That combined 12.5 million tonnes a year would amount to 12
percent of China's existing gas market.

The smaller liquefaction plants are near domestic fields and
have mushroomed across China in the past decade. They liquefy
gas from fields not located on the national pipeline grid, and
target the transport sector.

Last year alone, Kunlun helped put 28,000 LNG vehicles on
the road, up from just 2,000 the previous year, and aims to
boost that to 200,000 by 2015. The company worked with local
authorities to put more LNG buses on the road and also struck
deals with logistics firms and bulk diesel users such as cement
plants to switch fuel for heavy-duty trucks.

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